Opinion
Index No.: 653038/2014
11-02-2018
A&F HAMILTON HEIGHTS CLUSTER, INC., derivatively on behalf of HAMILTON HEIGHTS CLUSTER ASSOCIATES, L.P., and JAMES FENDT, derivatively on behalf of A&F HAMILTON HEIGHTS CLUSTER, INC., PLEASANT AVENUE ASSOCIATES, L.P., FAM PLEASANT AVENUE LLC, AFF-PSA BRONX 9-D, INC. and TAF ALEXANDER AVE. INC Plaintiffs, v. URBAN GREEN MANAGEMENT, INC. and ERIC ANDERSON, Defendants, -and- HAMILTON HEIGHTS CLUSTER ASSOCIATES, L.P., A&F HAMILTON HEIGHTS CLUSTER, INC., PLEASANT AVENUE ASSOCIATES, L.P., FAM PLEASANT AVENUE LLC, AFF-PSA BRONX 9-D, INC., and TAF ALEXANDER AVE., INC., Nominal Defendants. URBAN GREEN MANAGEMENT, INC., and ERIC ANDERSON, derivatively on behalf of AFF-PSA BRONX 9-D, INC., and FAM PLEASANT AVENUE LLC, Third-Party Plaintiffs, v. JAMES FENDT, ALEX ABREU, and YASMIN ROSADO, Third-Party Defendants, -and- AFF-PSA BRONX 9-D, INC., and FAM PLEASANT AVENUE LLC, Nominal Third-Party Defendants. WHGA HAMILTON HEIGHTS CLUSTER, INC. and WEST HARLEM HAMILTON HEIGHTS CLUSTER, INC., Intervenor-Plaintiffs v. HAMILTON HEIGHTS CLUSTER ASSOCIATES, L.P., A&F HAMILTON HEIGHTS CLUSTER, INC., A&F EQUITIES, LLC; and A&F HHC EQUITIES, LLC, Intervenor-Defendants.
NYSCEF DOC. NO. 1105
DECISION AND ORDER
Mot. Seq. Nos.: 021, 023, & 024 O. PETER SHERWOOD, J. :
Motion sequence numbers 021, 023 and 024 are consolidated for disposition in this Decision and Order. In motion sequence number 021, intervenors WHGA Hamilton Heights Cluster, Inc., ("GP-1") and West Harlem Hamilton Heights Cluster, Inc. ("New GP-1") seek imposition of sanctions against plaintiff and third party defendant James Fendt and his former attorneys for failure to turn over funds as required by orders of this court. In motion sequence number 023, the West Harlem Entities move for summary judgment to confirm their majority ownership interest in a partnership that owns and manages five rental properties in West Harlem. In motion sequence number 024, defendants Urban Green Management, Inc. ("Urban Green"), and Eric Anderson move for summary judgment dismissing the derivative claims of plaintiffs.
Note on abbreviations. The abbreviations set forth below appear throughout this Decision and Order:
| WHGA | West Harlem Group Assistance, Inc. | Parent of GP-1 and New GP-1 |
| GP-1 | WHGA Hamilton Heights Cluster, Inc. | General Partner of Partnership (67%) |
| New GP-1 | West Harlem Heights Cluster, Inc. | Same |
| GP-2 | A&F Hamilton Heights Cluster, Inc. | General Partner of Partnership (32%) |
| A&F HHC | A&F Hamilton Heights Cluster, Inc. | Same |
| LP | A&F Equities LLC | Limited Partner of Partnership (1%) |
| New LP | A&F HHC Equities LLC | Same |
| Partnership | Hamilton Heights Cluster Associates LP | Owner affordable housing properties |
BACKGROUND
The background to this case is set forth in detail in a Decision and Order authored by retired New York Supreme Court Justice Shirley Komreich and dated July 8, 2015 (Dkt. 230). West Harlem Group Assistance, Inc. ("WHGA"), owns intervenor plaintiffs WHGA Hamilton Heights Cluster, Inc. ("GP-1") and West Harlem Hamilton Heights Cluster, Inc ("New GP-1", and together, the "West Harlem Entities"). A&F Hamilton Heights Cluster, Inc. ("A&F HHC" or "GP-2") and GP-1 are general partners in Hamilton Heights Cluster Associates LP (the "Partnership"). GP-1 owns A 67% interest in the Partnership. GP-2 owns 32%. Anderson and Fendt each hold a 50% interest in GP-2 (see Dkt. 230, pp. 5-6). A&F Equities LLC ("LP") is the sole limited partner of the Partnership and has a 1% interest in the Partnership under a 1999 Partnership Agreement. The major issue in dispute is whether the Partnership's Limited Partnership Agreement (Agreement) (Dkt. 833) was ever amended and, if it was, the terms of that amendment.
"Dkt." followed by a number refers to the docket number of documents filed in this case in the New York State Courts Electronic Filing System".
Fendt began this litigation based on his interest in GP-2, claiming his former business partner, Anderson, through the then managing agent of the Partnership, Urban Green, mismanaged the Partnership. Fendt claimed the right to bring this litigation based on what he asserted was an undersigned 2004 amendment of the Partnership Agreement (Dkt. 158) and resolutions relating to the LP, leaving limited partner A&F HHC Equities (in which Fendt had no interest after March 2005 [see Doc. No. 230, p.7]) substituted in for general partner GP-2, and with a 99% interest in the Partnership, up from a 1% interest. Thus, according to Fendt, the interest of the West Harlem Entities and of GP-2 were reduced from 67% to 0.051 % and from 32% to 0.049%) respectively (id. at 8). The West Harlem Entities and Anderson vigorously dispute Fendt's claim.
In her Decision and Order dated July 8, 2015, Justice Kornreich recited that prior to March 2005, Anderson and Fendt together held a majority of the units in A&F Equities LLC ("LP"). In March 2005 Fendt withdrew and thereafter had no interest in LP (Dkt. 230, pp. 5-6). In this litigation Fendt asserts that prior to his withdrawal, LP assigned its interest in the Partnership to a new limited partnership which he controls, A&F HHC Equities LLC (New LP) (id. at 9), but Justice Kornreich found that "[n]o sworn statement or document supports [that] claim" (id. at n. 1).
WHGA is a community-based non-profit development and low-income housing corporation whose mission is to revitalize the West and Central Harlem communities. In the 1980's and 90's, WHGA obtained five developed properties then in serious disrepair, and invested in them. In 1998, WHGA decided to partner with Fendt and Anderson in order to rehabilitate the properties. WHGA planned to create a partnership to which WHGA would contribute the properties and to obtain loans to fund the work. WHGA caused GP-1 to create the Partnership in December 1998, with GP-1 as the general partner and A&F HHC (in which Fendt and Anderson each held a 50% interests) as the limited partner. On October 1, 1999, GP-1, GP-2 and LP signed a Limited Partnership Agreement (the "1999 Agreement") thereby forming the Partnership. The 1999 Agreement made A&F HHC (also referred to as "GP-2") a general partner instead of a limited partner and made A&F Equities LLC (referred to as "LP") a limited partner, with ownership interests as follows:
WHGA Hamilton Heights Cluster, Inc. ("GP-1") - General Partner - 67%(see Aff'd of Donald Notice, ¶ 10, Dkt. 832). This change was made to enable GP-1 to take affirmative steps to get New York City Housing Preservation Department ("HPD") approval for WHGA to contribute the properties and to allow LP to capture the Partnership's tax losses which were of no value to WHGA (id. ¶ 9 and Anderson Affd ¶ 6). Fendt and Anderson together had a majority interest in LP.
A&F HHC (GP-2") - General Partner - 32%
A&F Equities LLC ("LP")- Limited Partner - 1%
On or about March 14, 2001, WHGA deeded the properties to the Partnership (Notice Aff'd ¶ 12). The Partnership obtained over $3 million in loans and received a $430,000 government grant (which HPD credited to WHGA as an "Equity Distribution," Dkt 859, HPD Mortgage Schedule located after p. 39) to fund the repair work and hired A&F Commercial Builders (owned by Fendt and Anderson) to manage the work (id. ¶ 13). In 2004, the Partnership refinanced some of its loans. An unsigned draft partnership agreement, found with the closing documents, purports to swap out partners and change ownership percentages (id. ¶ 14). Among other changes, it left the West Harlem Entities with a 0.051% ownership interest in the Partnership while boosting Fendt's interest through New-LP to 99.99% (id. ¶ 16). Justice Kornreich held that these actions were not authorized even under the Unsigned Amendment (Dkt 230, at 8). Donald Notice, the Executive Director of WHGA, states that the West Harlem Entities were not represented by separate counsel at the refinancing. He claims that he inadvertently signed several documents, but none of those documents make the partner substitutions proper (Dkt 830, ¶20). Notice also states that starting in 2004, there were errors in the K-1 tax forms prepared for the Partnership, which showed the wrong parties and the wrong ownership percentages (id. ¶ 21).
Fendt argues that the credit is "incorrect" (Fendt Aff'd., ¶ 29). In any event, the same HPD loan document relied on by Fendt shows the "Participants and Principals" as A&F Equities, LLC with a 4% interest and WHGA with a 95% (Dkt. 859, Sponsor Review Report).
Fendt claims that "from 1998 to 2004" his entities "contributed a total of approximately $ 1, 901,664 in capital" (Fendt Aff'd ¶34) but cites only HPD letter dated December 9, 2004, amending the 2001 loan commitment which letter references "Barrower" Equity at $ 1,105,733 (Dkt. 859). The letter which amends the March 14, 2001 loan identifies the Partnership as the "Borrower" (The letter is located at the 50th page of Dkt. 859).
The unsigned amendment also purports to reduce GP-2's interest (owned equally by Anderson and Fendt) from 32% to 0.049% (Dkt 230, ¶ 16).
After Fendt began this action and through the limited partner tried to oust New GP-1 (a WHGA affiliate) from the Partnership, the West Harlem Entities moved to intervene in this case.
On July 8, 2015, Gregory Soumas was designated by Justice Kornreich as the Receiver in this action for the five properties. Soumas filed a $2 million undertaking. Justice Kornreich also appointed Michael Besen, of Besen & Assoc/NY Management as the Receiver's managing agent.
I. MOTION 021- West Harlem Entities' Motion for Contempt
Intervenors West Harlem Entities and Anderson (together, the "Contempt Movants" or "Movants") move for an order of criminal and civil contempt of court against Fendt, and non-parties Sheila Tendy, Katherine Daniels, Tendy Law Office, LLC ("Tendy Law" and together with Tendy and Daniels, "Attorney Respondents"), and Safeguard Realty Management. Inc. ("Safeguard", and together, "Contempt Respondents"), seeking imprisonment, fines, damages, and attorney's fees for the Contempt Respondents' failure to cease collection of Partnership receivables and to turn over all Partnership money to the Receiver as required by orders of Justice Kornreich dated July 8, 2015, September 10, 2015, and November 12, 2015. Contempt Respondents failed to comply as evidenced by Safeguard and Fendt continuing to move funds in and out of the Partnership accounts, emptying the Partnership account into Safeguard's account and then transferring the funds to an account belonging to a business owned by Fendt. In addition, Attorney Respondents (Fendt's lawyers at that time) misrepresented to the Receiver that all the Partnership monies had been turned over to him, and only offered to return the funds when exposed.
Tendy Law were the attorneys for the original plaintiffs in this case. Safeguard is the entity engaged by Fendt to manage the properties held by the Partnership.
A. Argument
1. Movants' Arguments
Movants seek a finding of criminal contempt pursuant to Judiciary Law 750, allowing punishment for "willful disobedience to [the court's] lawful mandate." Tendy's September 9, 2015 letter seeking leave to release Partnership funds to Fendt (Dkt. 749) shows the failure to turn over the funds was knowing and intentional. Safeguard is not a party to this action, but Tendy Law has represented that Safeguard was Fendt's agent for the purpose of attorney-client privilege, and so can be deemed to have been aware of the court's orders. As the funds have been returned, movants are not seeking to compel compliance, but instead seek punishment, pursuant to Judiciary Law 751(1), in the amount of $ 1,000 each (id. p. 4).
Movants also seek a finding of civil contempt to compensate for injury suffered by Contempt Movants. Finally, pursuant to Judiciary Law 770, Contempt Movants ask that Respondents be imprisoned and fined as punishment for their actions in depriving Contempt Movants, the Partnership and the Receiver of money Contempt Respondents unlawfully retained.
2. Fendt's Opposition
Fendt argues that contempt is a drastic remedy and must be shown by the required standard of proof (civil, by clear and convincing evidence; criminal, beyond a reasonable doubt). Contempt Movants have failed to show Fendt violated any of the court orders of July 8, September 10, or November 12, 2015 (as modified by an order dated November 23, 2015). There is no evidence that Fendt did anything before July 2016 to prevent funds in the Safeguard account from being transferred to the Receiver, as required by the July 8, 2015 order (Fendt 21 Opp at 12-13, Dkt. 964). To the contrary, his then counsel, Tendy, disclosed the existence of those funds, which remained in the Safeguard account only because outstanding checks had not cleared (id. at 13). Contempt Movants also failed to show civil contempt, as they failed to show an injury (id. at 14). Fendt returned the money in full, so there was no harm. While Contempt Movants contend they were deprived of the use and benefit of those funds for a time, Contempt Movants fail to show they were entitled to those funds (id. at 15). Nor can Fendt's alleged failure to respond to a non-judicial subpoena (he timely objected to it as an improper fishing expedition) be the basis for contempt as he would have to be ordered to comply by the court (id.).
3. Safeguard's Opposition
Before this action was commenced, the Partnership named Safeguard managing agent for the Partnership's properties for one year. During that year, the litigation began. In the July 8, 2015 order, the court instructed Safeguard to turn over the Partnership assets to Soumas. Movants have failed to show Safeguard willfully disobeyed the order (Safeguard 021 Opp at 2, Dkt. 941). The transfer was complex and had to be done gradually. The transfer was completed. Safeguard admits it continued to collect money for the Partnership and pay its expenses during the transition to the Receiver (id. at 11). While Safeguard transferred some Partnership assets to itself, it did so in error, but in good faith, and returned the funds quickly on being informed of its error. Safeguard believed the action had been settled, but only a portion of the action was resolved (id. at 12). As far as Contempt Movants rely on Safeguard's alleged failure to turn over books and records, the July 8 Order has no such a mandate (id. at 13). Contempt Movants have failed to show the willfulness required for civil contempt or the intent required for criminal contempt.
The record shows otherwise. The July 8, 2015 order directs that: "Anybody in possession of rent lists, orders, unexpired or expired lease, agreements, correspondence, notices or registration statements relating to rental space or facilities on the Properties shall turn them over to the Receiver." (Dkt. 228, ¶ 14). In an order dated October 30, 2015 the court directed Alexander Abrele and Jasmin Rosado, the Safeguard employees assigned to manage the properties "to turn over every piece of paper in their or Safeguard's possession regarding the buildings that are the subject of this lawsuit" (Dkt 419, p1). Also, in response to questions by the court at a hearing on September 21, 2016, the Receiver reported that he requested books and records for the properties but did not receive all of them. (Dkt. 741, p. 17).
As to Safeguard's alleged failure to answer the subpoena, the subpoena is defective, and it should be quashed. Safeguard is a non-party, making CPLR 3101(a)(4) applicable. The subpoena is flawed and unenforceable, as it did not include the required "notice stating the circumstances or reasons such disclosure is sought or required" (CPLR 3101[a][4]; id. at 16). Further, the subpoena is a fishing expedition (to discover if there are any other Partnership funds outstanding), and part of an attempt to harass and embarrass parties to this action (id. at 17-19).
4. Attorney Respondents Opposition and Cross-Motion for Sanctions
The Attorney Respondents argue that this motion is an attempt to drive a wedge between a party and its counsel. When Attorney Respondents discovered that Safeguard had not turned over all of the assets as required by the court's order, they immediately took action to remedy the situation (Attorney Respondents' 021 Opp, Dkt. 980 at 1-2, 4). In September 2015, Tendy learned that Safeguard was holding back some money to cover checks which had not yet cleared, such as for payments to the NYC Dept of Finance and to Tendy Law, totaling about $49,000. Safeguard asked Tendy to seek instruction from the court and Soumas as to how these funds should be handled. Tendy sought leave to have the funds delivered to Fendt, which leave the court denied (id. at 5). Attorney Respondents informed Safeguard and took no further action. Tendy's letter to the court does not demonstrate a knowing failure to turn over funds, it shows Tendy sought instruction about where the funds should go (id. at 12).
This argument is not credible. The July 8, 2015 order at ¶ 5 directs: "All parties to this action, their agents, attorneys and employees . . . and Safeguard Realty Management, Inc. shall immediately transfer over to the Receiver all cash accounts and monies held . . . and all future rents receivables . . ." (emphasis added) (Dkt 228, ¶ 5). Upon hearing of the refusals to comply. Justice Kronreich stated: "I don't understand why there [wasn't] a motion. I would like a motion on a contempt of the Court order (Transcript of September 21, 2016 hearing at p. 29, Dkt. 741).
The court previously noted the acrimony between defendants and Tendy Law, and that defendants have made a meritless motion to disqualify and for sanctions in order to harass Tendy Law (Decision and Order dated April 11, 2016, Dkt. 558). Attorney Respondents never had control of the funds at issue in this motion. There is no evidence Tendy's communications were knowingly false or intentionally misleading.
As far as Contempt Movants claim Attorney Respondents intentionally failed to file a management report for August 2015, as that report would have revealed the money being withheld, Attorney Respondents did not prepare such reports. Safeguard did. Safeguard stopped making reports after July 2015 because the properties were then under Soumas' control. Soumas provided the August 2015 management report (Dkt. 980 at 11).
Attorney Respondents cross-move for sanctions pursuant to 22 NYCRR section 130-1.1 on the ground that this motion is frivolous and based on a false premise. While Contempt Movants assert the court directed them to move for contempt, the court instructed them, at a conference, to bring their motion against whomever they wanted (id. Opp at 13). They were not told to file against Attorney Respondents. Nor does the motion show evidence the Attorney Respondents participated in the withholding of money. Finally, this is a harassing motion, intended to intimidate, including by seeking to have Attorney Respondents jailed.
5. Movants' Reply
Contempt Movants claim it is undisputed that, as of August 13, 2015, the respondents had turned over only $5,000 to the receiver. On that day, Safeguard sent Soumas a check for $24,308.61, which cleared on August 14, leaving $27,676.08 in the account. There were various deposits and withdrawals from that account, which was closed by Safeguard in July 2016, when it transferred the remaining $31,421.66 to Fendt. Contempt Movants dispute the facts provided by Safeguard, and dispute that it was necessary or appropriate for Safeguard not to turn over all assets and responsibilities to the Receiver immediately (Dkt. 988). Contempt Movants also question why, if Safeguard was transferring the $31,000 out of the account in July 2016 as outstanding management fees, Safeguard transferred that money to Fendt (id. at 7).
Contempt Movants defend the subpoenas, as it was coincidental that they found out about the funds at issue in this motion, and they want discovery to find out if there are additional monies belonging to the Partnership which have not been turned over (id. at 8).
B. Discussion
1. Civil Contempt
The court has authority to punish a litigant that disobeys a lawful mandate. (Judiciary Law § 753[A][3]; see also CPLR 5104 [enforcing a judgment or order by contempt). The purpose of civil contempt is to coerce compliance with a court order or to compensate a party who is injured as a result of disobedience of a court order (see State of New York v. Unique Ideas, 44 NY2d 345 [1983]; Department of Housing Preservation and Development v. Deka Realty, 208 AD2d 37 [2d Dept 1995]). Actual costs and expenses, including attorney's fees, are a legitimate category of recovery for a contempt citation (see Dorio v. Peekskill Common Counsel, 13 AD3d 523 [2d Dept 2004]; Alpert v. Alpert, 261 AD2d 247 [1st Dept 1999]).
Section 753 (A)(3) of the Judiciary Law, provides, in relevant part:
"A court of record has power to punish, by fine and imprisonment, or either, a neglect or violation of duty, or other misconduct, by which a right or remedy of a party to a civil action or special proceeding, pending in the court may be defeated, impaired, impeded, or prejudiced, in any of the following cases: . . . 3. A party to the action or special proceeding . . . for any other disobedience to a lawful mandate of the court."Nonetheless, contempt is a drastic remedy, which should not issue absent a clear right to such relief (Coronet Capital Co. v. Spodek, 202 AD2d 20 [1st Dept 1994]; Usina Costa Pinto, S.A. v. Sanco Saw Co. Ltd., 174 AD2d 487 [1st Dept 1991]). To establish civil contempt based on an alleged violation of a court order, the movant must establish, by clear and convincing evidence, that a lawful order of the court expressing an unequivocal mandate was in effect, and that the order was disobeyed to a reasonable certainty (see In re Department of Envtl. Protection of City of N.Y. v. Department of Envtl. Conservation of State of NY, 70 NY2d 233 [1987]; In re. McCormick v. Axelrod, 59 NY2d 574, amended 60 N.Y.2d 652 [1983]; Vujovic v. Vujovic, 16 AD3d 490 [2d Dept 2005]). The party to be held in contempt must be shown to have had knowledge of the order, and the disobedience must have prejudiced the rights of another party (see McCain v. Dinkins, 84 NY2d 216 [1994]; In re McCormack, 59 NY2d 574; Garcia v. Great Atl. & Pac. Tea Co., 231 A.D.2d 401 [1st Dept 1996]). A party can be found to be in civil contempt even if the disobedience is not willful or deliberate (see Yalkowsky v Yalkowsky, 93 AD2d 834, 835 [2nd Dept 1983] ["intent or willfulness is not required to hold a party in contempt for disobeying a court order or subpoena"]). The burden of proof is on the party seeking a civil contempt order (see McCain, 84 NY2d at 227).
It is undisputed that Safeguard, failed repeatedly to obey the court's July 8, 2015, order to turn over all of the assets 'immediately" (Dkt 228). Instead Safeguard engaged in a pattern of conduct contrary to the direction of the court, including, continuing to collect rents that should have been remitted to the Receiver, withholding funds in the Partnership account for over a year, paying itself fees using Partnership funds and eventually transferring the remaining balance to Fendt. This pattern shows deliberate misconduct and belies claims that the transfers were "complex", or that misappropriating funds to pay itself was "error". In their defense against the motion, Attorney Respondents seek to shift responsibility for the contempt onto Fendt and Safeguard. The Attorney Respondents (or their agents) were not in possession of the money, so did not violate the court order. However, it is clear to this court that Tendy Law attorneys were complicit in the acts of Fendt and Safeguard. Despite the clear and unequivocal direction of the court in its July 8, 2015 order, Attorney Respondents feigned a need for "guidance" (Dkt. 256) and, worse sought "permission for Safeguard . . . to return [purported] personal funds . . . to Fendt" (Dkt 268 at p. 1). In a letter to the court dated August 13, 2015, the attorney Respondents represented that "[a]pproximately $26,462 remains in the owner entities accounts." (Dkt. 256, p. 1). The representation was false. The Attorney Respondents state that they were unaware of the falsity of the statement. Considering the multiple refusals of Fendt and Safeguard to cooperate and the complaints of the Receiver concerning such refusal, this court concludes that the Attorney Respondents' purported ignorance of what was occurring in their midst is not credible. The best that can be said is that the lawyers for Fendt engaged in studied indifference to the contempts of their client and its agent, Safeguard.
Safeguard and Fendt's disregard of Justice Kornreich's multiple orders prejudiced the Partnership by depriving the Receiver of funds needed to carry out his responsibilities in a timely manner. It also resulted in the majority owners of the Partnership incurring legal expenses to enforce the court's orders. Accordingly, the motion is granted to the extent it seeks an order of civil contempt, against Fendt and Safeguard. The motion is denied as to the Attorney Respondents because, through complicit, none of them has been shown to have violated any court order.
Safeguard and Fendt shall pay the Partnership interest on funds withheld at the statutory rate of 9% and shall reimburse Contempt Movants for the legal expenses incurred flowing from the failures to comply with the July 2018 order (and subsequent related orders) and their efforts to enforce the court's orders. Safeguard and Fendt shall meet and confer with Contempt Movants within 21 days of the date of this Decision and Order to attempt to reach agreement on the amount owed as a consequence of the decision on this motion sequence number 021. Failing agreement, Contempt Movants, or either of them, may request a hearing to fix the amount to be paid.
2. Criminal Contempt
Judiciary Law 750 provides that:
"A court of record has power to punish for a criminal contempt, a person guilty of any of the following acts, and no others:Because Contempt Movants have failed to prove criminal contempt beyond a reasonable doubt, this branch of the motion is denied.
1. Disorderly, contemptuous, or insolent behavior, committed during its sitting, in its immediate view and presence, and directly tending to interrupt its proceedings, or to impair the respect due to its authority.
. . .
3. Willful disobedience to its lawful mandate.
. . .
7. Willful failure to obey any mandate, process or notice . . ."
3. Cross-Motions to Quash
Because Safeguard has been less than fully forthcoming as to funds withheld, limited discovery is warranted. Contempt Movants shall have reasonable discovery to determine whether there has been full and complete compliance with Justice Kornreich's turnover orders. The motion to quash is granted as there is no need for a subpoena given the rulings on civil contempt.
4. Cross-Motion for Sanctions
Regarding Attorney Respondents' cross-motion for sanctions, they are correct that the court did not instruct Contempt Movants to move against the Attorney Respondents. That fact is of no moment as Contempt Movants had ample grounds for seeking a contempt finding, including against the Attorney Respondents. The Administrative Rules of the Unified Court System provide that "[t]he court, in its discretion, may award to any party or attorney in any civil action or proceeding before the court . . . costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney's fees, resulting from frivolous conduct as defined in this Part" (22 N. Y.C.R.R: 130-1.1(a)). Frivolous conduct is defined as follows:
"(1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law;(Id. at 130-1.1[c]). None of these are present here. The cross-motion is without merit and is denied.
(2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or
(3) it asserts material factual statements that are false."
II. MOTION 023- West Harlem Entities' Motion for Summary Judgment
Intervenors West Harlem Entities ("Movants"), move for summary judgment, seeking (1) a declaratory judgment that the signed Limited Partnership Agreement dated October 1, 1999, is the only agreement which binds the Partnership and the draft unsigned agreement is neither effective nor binding; and (2) an injunction enjoining LP and New LP from taking any action on behalf of the Partnership without consent of GP-1; and (3) dismissal of the derivative counterclaims of LP and New LP. The motion is opposed by New LP and Fendt (for purposes of this motion sequence number 023 "Respondents").
A. Facts
The West Harlem Entities allege WHGA once owned the five properties which are now owned by the Partnership. In 1998, WHGA and another entity (it is disputed whom) entered into a related agreement. In December 1998, GP-1 filed a Certificate of Formation, creating the Partnership, identifying GP-1 as the general partner and GP-2 as the limited partner (Dkt. 832, ¶ 9). On October 1, 1999, a new limited partnership agreement was signed for the Partnership (the 1999 Agreement) whereby GP-2 was removed as the limited partner and made a general partner and LP was substituted in as the new limited partner (id.). This structure of the Partnership was selected so as to allow other entities related to Anderson and Fendt (each a 50% owner of GP-2) to participate in the project and capture the Partnership tax losses (id.) (see also Fendt, Aff'd ¶ 50, Dkt. 76).
On this motion, the parties dispute which entity owns which percentage of the Partnership. In March 2001, WHGA transferred ownership of the properties to the Partnership (id. ¶ 10). The Partnership then obtained loans totaling about $3 million and a government grant of over $1.5 million (id. ¶ 12). The Partnership retained A&F Commercial to rehabilitate the buildings (id. ¶ 13). Fendt and Anderson hold interests in A&F Commercial.
In 2004, the Partnership refinanced some of its loans with permanent financing (id. ¶ 14). Movants claim a draft unsigned amendment to the 1999 Agreement (the Disputed Amendment) was "found in the Partnership's attorney closing binder . . . , along with a copy of the" signed 1999 Agreement (Movants' 19-a Statement, ¶ 18). Respondent maintains the Disputed Amendment is the operative agreement of the Partnership (Opposing 19-a Statement, ¶ 18). It is disputed how many versions of the Disputed Amendment have been found. The Disputed Amendment purports to substitute in New GP-1 as general partner instead of GP-1 and substitute in New LP as limited partner instead of LP (Fendt Aff., Ex. 13, Dkt. 891). The provenance and effectiveness of the Disputed Amendment are also disputed (Dkt. 832, ¶ 14). Movants claim the Disputed Amendment was not discussed or agreed to (id. ¶ 15). No signed copy of the Disputed Agreement has been produced.
Movants claim that when the loans were refinanced in 2004, the Partnership borrowed more funds to cover additional construction expenses. New LP disputes the amount of, nature of, and reason for those expenses, and claims the funds came from additional capital supplied by LP which should be credited to the entity which replaced it, New LP.
At the closing in 2004, "Donald C. Notice inadvertently signed a Resolution of the Partnership and Partner's Consent, a Resolution of a General Partner of the Partnership, a Restated and Amended Consolidated Mortgage Note, and a spreader Agreement - all on behalf of New GP-1 (the "NYCB Loan Related Documents")" (Movants' 19-a Statement, ¶ 38). New LP disputes that Notice signed "inadvertently" and claims he also signed other, related documents. Movants claim no attorney was at the closing representing their interests, which Respondent also disputes.
The parties also dispute whether this court, by a prior order, held that A&F HHC Equities (New LP) was ever substituted as a limited partner (19-a Statements, ¶ 60).
This court notes that on Anderson's Motion to Dismiss, Justice Kornreich wrote:
"To summarize, the documentary evidence belies plaintiffs [effectively Fendt] claim that they control the Partnership's management, or that they validly removed New GP-1. Further, there is no formal documentation demonstrating the GPs' written agreement to the Undersigned Amendment. The resolutions of the LP signed by Fendt are not enforceable because he had previously renounced his interests and positions in that entity, as had one of the other signatories, Nicolai. Finally, Fendt has claimed that the LP and the New LP are the sole limited partner in taking actions at issue here. Both statements cannot be true."Dkt. 230, 12.
B. Argument
1. West Harlem Entities' Arguments
Movants advance four arguments in support of the motion. First, New LP is not a limited partner of the Partnership because the Revised Limited Partnership Act (RLPA), sections 121-704, and section 19 of the signed Limited Partnership Agreement require all partners to give written consent for an assignment to be effective (023 Memo at 4). Movants claim that in her Decision and Order dated July 8, 2015, Justice Kornreich held that there was "no formal documentation demonstrating the GP's written agreement to the [Draft] Unsigned Agreement" (Dkt. 230, at 12). In a related case, Justice Singh reiterated the lack of a signed agreement that would give New LP an interest in the Partnership (see Decision and Order, dated April 7, 2017, Dkt. 861, at 5). Accordingly, New LP has no interest in the Partnership, and the West Harlem Entities' interest in the Partnership could not have changed.
Second, Movants contend the signed Partnership Agreement was not amended, as RLPA section 121-110(c) requires such an amendment to be made in writing (023 Memo, Dkt. 362 at 6), and there is no such writing. Nor was a Certificate of Amendment filed with the State. As far as Fendt argues that the documents inadvertently signed by Notice at the closing are the equivalent of West Harlem Entities' consent to the change, that argument is ineffective. Those documents were not prepared by anyone representing the West Harlem Entities' interests and the documents do not satisfy the requirements to serve in that capacity. Nor did LP or New LP rely on those documents (id. at 7).
Regarding the K-1 tax forms filed after 2004, those tax forms cannot establish ownership of the Partnership. They have the wrong entity name, and, regardless, a K-1 cannot be substituted for the required written consent. Further, the K-1 were not prepared by the West Harlem Entities. Generally, under New York law, "tax documents are not conclusive in determining ownership, and when compared with more reliable documents, like partnership agreements, are on a relative basis only marginally probative" (id. at 9). They certainly cannot estop a party from making a contrary argument (id. at 10).
Fourth, statements made by Eric Anderson to the Partnership's accountant are not binding on the West Harlem Entities, or determinative of any entity's interest in the Partnership, as Anderson was not an agent of the West Harlem Entities (id. at 11).
2. A&F HHC Equities (New LP)'s Opposition
New LP argues that the parties' course of conduct is evidence that the West Harlem Entities agreed to the modification of the Partnership Agreement. The 1999 Agreement does not require modifications to be in writing. Notice's statement that he "inadvertently" signed certain documents at the closing is unbelievable (023 Opp Memo, Dkt. 928). Fendt states, in his affidavit, that "either Notice or Anderson, or both, evidently had the Restated Agreement prepared on behalf of the Limited Partnership" (Fendt aff, ¶ 44, Dkt. 876). On December 22, 2004, WHGA incorporated New GP-1, which was consistent with the terms of the Disputed Amendment (023 Opp Memo, Dkt. 928, at 3; and Fendt aff, ¶ 56[b-c], Dkt. 876). The West Harlem Entities used the firm of Love and Long, LLP to incorporate New GP-1, and allowed GP-1 to dissolve before making the substitution (id.). On the date of the closing, Notice and Anderson signed a "Certified Resolution of Limited Partnership Authorizing Loan and Mortgage and Partner's Consent," which represented and warranted that New GP-1, New LP, and "A&F GP" were the only partners in the Partnership. Notice signed for New GP-1 and Anderson signed for New LP and A&F GP. That morning, Anderson exchanged e-mails with the Partnership's accountant confirming the substitutions and the new ownership percentages (id. at 4; and Fendt aff, ¶56[f]). Anderson later confirmed the new partners and percentages to the accountant in April of 2005 (id. at 5; and Fendt aff ¶ 62). Notice even admitted the substitutions in an affidavit submitted in this action (Dkt. 913, 13). Anderson similarly admitted New LP to be a limited partner in the Partnership (id. ¶ 21, citing Verified Petition in Anderson v Aff-PSA Bronx 9D, Inc., Index No. 653038/2014).
The assertion that Notice "admitted the substitution" is belied by the next numbered paragraph of the Notice affidavit relied on by Fendt where Notice states:
14. While I do not remember the Draft Unsigned Partnership Amendment, or it even being circulated to me, I am absolutely certain that neither WHGA, WH Cluster 1, WH Cluster 2 , nor the GP, itself, discussed the Draft Unsigned Amendment with the Limited Partner or agreed upon the terms contained in the Draft Unsigned Amendment.Dkt 913, ¶ 14 (emphasis in affidavit).
The statement is misleading. The cited Verified Petition signed by Anderson does not support the argument Respondents make, i.e. that GP-1 ceded a 99.9% interest in the Partnership to New LP. The Verified Petition, dated July 2, 2015, confirms at ¶ 14 that GP-2 "is a for-profit New York business corporation whose sole business is to serve as one of two general partners (or, alternately, as a 49% member of the sole general partner) of Hamilton Heights Cluster Associates, LP ("HHC, LP"), which owns five multi-family apartment buildings in upper Manhattan (the other general partner or 51% member of the general partner of HHC, LP is a subsidiary of West Harlem Group Assistance, Inc. ("WHGA"), a New York not-for-profit corporation" emphasis added) (Dkt. 914, ¶ 14).
Subsequent tax returns are consistent with this approach (Dkt. 928 at 6, 15-16). The Disputed Amendment provides that Partnership losses will be allocated as follows:
New GP-1 - 0.051%Capital proceeds would be allocated 50% to general partners and 50% to limited partners (id. at 7). The parties never intended the original divisions to stand. GP-1 only received 67% originally because it was a requirement for the loan program (id.). Notice's and Anderson's defense that they never "caught" the "mistakes" in the K-1 tax forms is incredible and should not be given weight (id. at 16-17). Nor should Notice's argument that Anderson was not West Harlem Entities' agent (id.). Anderson was the tax matters partner and claims he did not notice the entity names and percentages which he now says are wrong (id. at 18).
A&F HHCO - .049%
A&G HHC Equities - 99.9 %
Respondents assert that a writing is not required. They argue that the 1999 Agreement requires consent of all the partners for a limited partner to assign an interest in the partnership and have the new interest holder receive all of the transferor's rights (id. at 20). It does not mention written consent. RLPA section 121-704 allows such a transfer if "(ii) all partners consent in writing, or (iii) to the extent that the partnership agreement so provides" (id., quoting RLPA section 121-704). As far as the West Harlem Entities claim RLPA section 121-110(c) requires a writing, equitable estoppel, waiver, and the parties' course of conduct can serve in its stead (id. at 21).
Respondents maintain that the court has not yet decided this issue (id. at 23). They argue that the July 8, 2015, order merely discussed, but did not decide, the question, and the April 11, 2016, order clarified that the issue was still open (id.). This issue is fact-intensive, and discovery should be completed before making a determination (id. at 23-24).
3. West Harlem Entities' Reply
The West Harlem Entities reply that regardless of the parties' conduct (and West Harlem Entities dispute Respondents' assertions), there can be no amendment of the Partnership Agreement without a writing, as is required by RLPA section 121-110(c). As far as Fendt claims the limited partner's alleged work advances support his argument that there was an amendment, the advances were not made by the limited partner, who had no authority to make such advances, and they were much less than Fendt claims. Fendt's calculations simply do not add up (023 Reply at 1-2).
New LP is not a partner of the Partnership (id.at 2). RLPA section 121-704 and the 1999 Agreement require a written consent to make the substitution, and that was never done. The court's July 8, 2015, order stating that no assignment was in the record reflects this reality. While paragraph 20 of the 1999 Agreement notes that there are HPD restrictions, such as prohibiting changing the partners without written approval of HPD until the Certificates of Completion had been issued, that does not mean that written consent of the other partners is not needed after the certificates had been provided (id. at 3-4). Nor does paragraph 20 address the issues like changes in percentages of interest (id. at 4). Moreover, HPD did not consent to the reduction of West Harlem Entities' interest in the Partnership (id.).
The Disputed Amendment purports to reduce the amount of profits received by the West Harlem Entities from 67% to 0.051%, and the distribution of capital from 67% to 26% but only after a return of the limited partner's purported capital contribution (id. at 6-7). The court's prior decisions state that such changes required written consent (id. at 7 and July 8 Decision at 8, Dkt. 230).
As to the alleged contributions of the limited partner, West Harlem Entities argue the purported work advances do not qualify as a capital contribution because the advances were made by A&F Builders, not the limited partner. The unpaid work advances totaled, at most, $556,375, and not almost $2 million, as Respondents claim. The limited partner was not allowed to make the alleged advances and dilute the West Harlem Entities' interest in the Partnership (id.). Moreover, the numbers just don't add up.
The cases cited by Respondents for the premise that estoppel or course of conduct can waive the requirement for a written consent to change are distinguishable. Further, as far as Respondents claim estoppel applies, Respondents fail to explain how it relied to its detriment on the Disputed Amendment (id. at 8). Moreover, the documents signed at the closing do not suffice to amend the Partnership Agreement, even if they operate to assign GP-1's partnership interest to New GP-1.
The K-1 tax forms cannot substitute for the required written agreement (id.at 10, citing July 8, 2015 Decision and Order at 11). Nor can they bind the West Harlem Entities, as they were not prepared by them, and the West Harlem Entities did not take that position in a sworn tax filing, making the cases cited by Respondents prohibiting a party from taking a position contrary to one taken in a sworn tax filing inapplicable (id. at 11).
Statements by Anderson, even if they support Respondents, cannot be used against the West Harlem Entities. Anderson is not an agent of the West Harlem Entities and is not authorized to speak on their behalf (id. 12). Nor have Respondents shown the need for additional discovery. Respondents have not specified what documents or information they need to proceed, or how the documents or information would affect their arguments on this motion (id. at 13).
C. Discussion
The standards for summary judgment are well settled. Summary judgment is a drastic remedy which will be granted only when the party seeking summary judgment has established that there are no triable issues of fact (see CPLR 3212 [b]; Alvarez v Prospect Hosp., 68 NY2d 329 [1986]; Sillman v Twentieth Centwy-Fox Film Corporation, 3 NY2d 395 [1957]). To prevail, the party seeking summary judgment must make a prima facie showing of entitlement to judgment as a matter of law tendering evidentiary proof in admissible form, which may include deposition transcripts and other proof annexed to an attorney's affirmation (see Alvarez v Prospect Hosp., supra; Olan v Farrell Lines, 64 NY2d 1092 [1985]; Zuckerman v City of New York, 49 NY2d 557 [1980]). Absent a sufficient showing, the court should deny the motion without regard to the strength of the opposing papers (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851 [1985]).
Once the initial showing has been made, the burden shifts to the party opposing the motion for summary judgment to rebut the prima facie showing by producing evidentiary proof in admissible form sufficient to require a trial of material issues of fact (see Kaufman v Silver, 90 NY2d 204, 208 [1997]). Although the court must carefully scrutinize the motion papers in a light most favorable to the party opposing the motion and must give that party the benefit of every favorable inference (see Negri v Stop & Shop, 65 NY2d 625 [1985]) and summary judgment should be denied where there is any doubt as to the existence of a triable issue of fact (see Rotuba Extruders, v Ceppos, 46 NY2d 223, 231 [1978]), bald, conclusory assertions or speculation and "[a] shadowy semblance of an issue" are insufficient to defeat a summary judgment motion (S.J. Capalin Assoc. v Globe Mfg. Corp., 34 NY2d 338, 341 [1974]; see Zuckerman v City of New York, supra; Ehrlich v American Moninger Greenhouse Mfg. Corp., 26 NY2d 255, 259 [1970]).
Last, "[a] motion for summary judgment should not be granted where the facts are in dispute, where conflicting inferences may be drawn from the evidence, or where there are issues of credibility" (Ruiz v Griffin, 71 AD3d 1112 [2d Dept 2010], quoting Scott v Long Is. Power Auth., 294 AD2d 348 [2d Dept 2002]).
Partnership Law § 121.110 provides in part:
"(c)The partnership agreement of a limited partnership may be amended from time to time as provided therein; provided, however, that, except as may be provided otherwise in the partnership agreement, without the written consent of each partner adversely affected thereby, no amendment of the partnership agreement shall be made which (i) increases the obligations of any limited partner to make contributions, (ii) alters the allocation for tax purposes of any items of income, gain, loss, deduction or credit, (iii) alters the manner of computing the distributions of any partner, (iv) alters, except as provided in subdivision (a) of section 121-302 of this article, the voting or other rights of any limited partner, (v) allows the obligation of a partner to make a contribution to be compromised by consent of fewer than all partners or (vi) alters the procedures for amendment of the partnership agreement."(Partnership Law § 121-110).
Partnership Law section 121-704 (right of assignee to become limited partner) allows an assignee to become a limited partner without a writing by the other partners, but only if the partnership agreement so provides. The 1999 Agreement provides for assignment of partnership interests on consent, but it does not authorize such consent without a writing. Here, Respondents seek to have the Disputed Amendment affecting fundamental changes in the corporate structure, including change of ownership percentages, stripping the majority unit owner of virtually all of its equity without compensation and removing of the general partners, all without a signed writing by any of the parties to the Partnership Agreement.
In her decision on a motion to dismiss, dated July 8, 2015, Justice Kornreich held that certain actions of the Partnership were not "authorized by the Unsigned Amendment since there is no written agreement of the partners approving it" (Dkt. 230, at 8). Further, "there is no formal documentation demonstrating the [West Harlem Entities'] written agreement to the Unsigned Amendment" (id. at 12). Also, "the K-1s [do not] prove conclusively that the Unsigned Amendment is binding because K-1s cannot substitute for a written, signed agreement of the partners. Moreover, the K-1s name a non-existent entity" (id.). In a related action, Fendt v WHGA Hamilton Heights, Index No. 652188/2016, Justice Singh described the decision in the July 8, 2015, Decision and Order as "[holding] that [New LP] and Fendt had no authority . . . because the 2004 restructuring was never memorialized in a signed writing. Thus, New LP was never substituted as the limited partner, because such a substitution, along with the change in ownership percentages contemplated by the purported restructuring, would have required written consent of Old GP-1 and A&F Hamilton Heights, under both the Partnership Agreement and pursuant to Partnership Law § 121-110(c)" (reproduced in the record of this case at Dkt. 861). This court agrees.
In a Decision and Order dated April 11, 2016 (NYSCEF Doc. No. 915), Justice Kornreich clarified her July 8, 2015, decision, explaining that the 2015 decision only held that Fendt did not have authority to bring that action "based on the documents submitted at the time" (id. at 4). In the years since that decision was rendered, plaintiffs have had ample opportunity to bring forth material evidence in admissible form to support their claim of a change of ownership but have failed to do so. At this late date plaintiffs are not entitled to defeat the motion on the ground that further discovery is needed (see Dennis v City of New York, 304 AD3d 611, 613 [2d Dept 2003]). Moreover, plaintiffs have not shown by affidavit that facts essential to justify opposition may exist but cannot then be stated (see CPLR 3212 [f]). And, but for spreadsheets showing an equity interest of GP-2 in the Partnership, plaintiffs have not shown equity contributions that would justify giving New LP a 99.9% ownership interest in the Partnership. It is undisputed that GP-2 has a 32% stake in the Partnership.
"The doctrine of the "law of the case" . . . applies to various stages of the same action or proceeding [with the] purpose [of] avoid[ing] the re-injection of issues already determined within it (§ 448 Law of the Case, Siegel, N.Y. Prac. § 448 [6th ed.]). Accordingly, the questions of whether a written, signed agreement is necessary to amend the Partnership Agreement, and whether the K-1s could substitute for such an agreement, have been resolved. While there were "issues of fact surrounding the Unsigned Amendment that would benefit from discovery" (April 11, 2016 Decision and Order at 4), none of the remaining issues of fact are material.
This court held previously that a writing is required to make the changes to the Partnership Agreement contemplated by the Disputed Amendment. No writing has been provided. The court now reaffirms that holding. Accordingly, the first claim for relief sought by GP-1 and New GP-1 is granted. The 1999 Agreement is the governing document of the Partnership and the Disputed Amendment never came into effect.
As to the other request of the Movants, to (a) enjoin LP and New LP from taking action on behalf of the Partnership without GP-1's consent, and (b) dismiss the derivative counterclaims, the relief requested is granted. In their Answer and Counterclaims, GP-2 and New LP, suing derivatively on behalf of the Partnership, seek (1) a declaratory judgment that the Disputed Amendment is operative and (2) damages to the Partnership for breach of fiduciary duty against GP-1 and New GP-1, for alleged failure to maintain accurate records of ownership and their acquiescence in Urban Green's alleged mismanagement of manage the property (Dkt. 846, pp. 11-13). For the reasons discussed above, the first request is granted and the first counterclaim is dismissed. As to the second request, Fendt lacks standing to bring a double derivative claim because GP-2 is a minority unitholder in the Partnership (see Pessin v Chris-Craft Industries, Inc., 181 AD 2d 66, 72 [1st Dept 1992]). Moreover, the court has rejected the claim that the 1999 Agreement was amended. As to the standing of New-LP, section 19 of the 1999 Agreement allows a limited partner to assign his interest in the Partnership. It provides that, "the assignee shall have the right to become a substituted limited partner and entitled to all the rights of the assignor if all of the partners (except the assignor) consent" (emphasis added) (Dkt. 833, § 19). Absent such consent, "the assignee is only entitled to receive the share of the profits to which his assignor would be entitled" (id.). Both the Harlem Entities and Anderson deny giving such consent and the record is barren of evidence of any. Accordingly, New LP lacks standing to sue on behalf of the Partnership. The second counterclaim must be dismissed.
The final relief sought on this motion is an injunction to prevent LP and New LP from taking action on behalf of the Partnership without GP-1's consent. The current need for this relief has not been developed on the motion. Further, there has been no discussion of the conduct at which the requested injunction is aimed. The requested relief is denied.
D. Conclusions (motion sequence number 023)
For the reasons discussed above, the motion for summary judgment shall be granted in substantial part. The Disputed Amendment is not effective. A declaratory judgment that the 1999 Agreement is the operative governing document of the Partnership shall be granted. The first counterclaim for a declaratory judgment that the Disputed Amendment is operative is dismissed. The second counterclaim, brought derivatively on behalf of the Partnership for breach of fiduciary duty against GP-1 and New GP-1, based on their alleged failure to maintain accurate records of ownership and acquiescence in Urban Green's alleged mismanagement of the properties, is dismissed. The requested injunction to prevent LP and New LP from taking action on behalf of the Partnership without GP-1's consent is denied as unnecessary.
III. MOTION 024- Anderson Parties' Motion for Summary Judgment
A. Facts
Urban Green Builders (Urban Green) succeeded BAF Community Links Services and Management LP (BAF) as the managing agent for the Partnership, (BAF Management Agreement, Dkt. 416). BAF started in 2001, and Urban Green in 2005. The BAF Management Agreement provides that the agent would be paid 6% of collected rental payments until the renovation was completed and "achievement of 90% of the post-rehab rent roll," at which time BAF would be paid 8%) of the rents collected (id. at 8). Urban Green did the same work as BAF, and Fendt has not produced any documents showing Urban Green had an agreement to do the work for 3% of the collected rents. The discovery deadline has passed. Fendt has not produced requested documents or a privilege log. Further, he has not appeared for a deposition despite having received multiple demands for same.
B. Arguments
1. By Movants
Urban Green and Anderson ("Anderson Parties" or "Movants") contend that the remaining claims against them, based on allegations of diverting Partnership funds by charging 8%) rather than 3%), should be dismissed because the BAF Management Agreement and the 1999 Agreement provide for an 8% fee (see 1999 Agreement, section 12). Fendt has not produced any documents suggesting otherwise, other than the report of his accountant. The report is based on documents not produced in this action. Fendt has refused to produce the accountant for deposition (Dkt. 868, at 3). Fendt has not produced any document to support his claim that Urban Green was not entitled to an 8% fee (id. at 8). In fact, Fendt's forensic accountant was instructed to assume the 3% fee was correct (id.).
Movants assert that Fendt has failed to comply with his discovery obligations. He was asked repeatedly for relevant documents and depositions, but refused to cooperate, despite being warned that the discovery cutoff set by Justice Kornreich was approaching. Fact discovery cutoff was originally set for December 31, 2015, with the note of issue (NOI) due on March 31, 2016 (id). While interim deadlines were extended, the NOI deadline was not (id.). Despite the long-past deadline, Fendt has not produced electronically stored information or a privilege log, bank accounts, ledgers, account statements, invoices, or other documentation. The only item he has produced is the forensic accounting report, without backup documentation. That report cites no evidence produced in the case, making the report inadmissible hearsay (id. at 5).
Finally, Fendt lost his standing to bring derivative claims in December 2015, when Anderson exercised his right to purchase Fendt's shares in GP-2 (Fendt has no share in New LP) (Memo at 3). Fendt filed a petition to dissolve certain entities, including New LP, on December 10, 2015, pursuant to BCL section 1104-a (id. at 9). Anderson then sent a Note of Election to Purchase Petitioning Shareholder's Shares, pursuant to BCL section 1118 (id. at 10, citing Notice, Dkt. 526). According to BCL 1118, the value of the shares is determined as of the date before the filing of the petition, making December 9, 2015, the last day Fendt had an interest in GP-2, or standing to prosecute this claim (Memo at 10). Any valid derivative claims should be raised in the valuation proceeding, not in this case.
2. Opposition
Fendt argues, first, that discovery is not complete (Dkt. 955, at 1). After the original scheduling order, the case became much more complex, and the schedule was modified (id. at 1-2). The case was also stayed for an extended period to allow the parties to mediate their disputes (id. at 2-3). None of the parties have been deposed. Fendt urged further discovery schedule should be set to allow the parties to complete discovery (id. at 5-6).
Counsel cites no modification order and upon a review of the docket, the court found none.
Justice Singh's order staying "the case" is dated May 8, 2017, more than a year after March 1, 2016, the date set for completion of all discovery and March 31, 2016, the deadline for filing the Note of Issue (see Dkt. 943). The stay order is silent on the issue of discovery (see Dkt. 949).
As to the question of standing, Fendt argues that a buyout election does not deprive a shareholder of standing to bring a derivative claim (id. at 6-7). Fendt relies on Slade v Endervelt (174 AD2d 389, 392 [1st Dept 1991]), in which the First Department allowed a shareholder to pursue a dissolution proceeding simultaneously with a derivative action, even after the buyout.
Movants do not submit evidence contradicting the claim, not even an affidavit denying the accusation of misappropriation (id. at 3). Fendt has produced a sworn affidavit and the report of his forensic accountant detailing the misappropriation of $634,422 (id. at 4, Report at Dkt. 951). Tax returns and general ledgers supporting the Report were either in Movants' possession or embodied in the report.
The report purports to calculate the "proper" amount of fees based on a 3% fee, deemed by the expert to be "market rate". The report compares that calculation to the amount of fees taken by Urban Green.
3. Movants' Reply
Movants assert Fendt failed to seek an extension of the discovery deadlines, despite being repeatedly reminded by Anderson's counsel that the deadlines were imminent (id. at 3). Counsel should not be allowed to undo those choices now. Nor has Fendt stated what discovery is needed to allow him to oppose this motion as required by CPLR 3212(f) (id.).
In their reply, Movants assert for the first time that the derivative claims are also faulty for Fendt's failure to make a demand on the company to take action (Reply, Dkt. 997, at 1).
Movants argue Slade is distinguishable because, here, Fendt is bringing a "double derivative" claim, suing derivatively for GP-2 and alleging its failure to sue the Partnership (id. at 4, citing nothing). Movants argue the forensic expert report is hearsay, and is based on documentation, such as general ledgers, not produced in this action. The report also assumes 3% is the proper fee and calculates the misappropriation from there, also asserting falsely that there is no written agreement. The Partnership Agreement as well as the BAF Management Agreement show fees fixed at the 8% rate; as do other contemporaneous documents which Fendt has in his possession (Reply at 3, citing Dkts. 879, 883).
Movants also contend that Fendt "seems to concede" that "if the original partnership agreement and the original management agreement are still in effect, his derivative claims fail as a matter of law" (Reply at 4). Movants add that even the terms of the Disputed Amendment support their position.
C. Discussion
As discussed above, the 1999 Agreement is valid and binding. It provides for the management company to be paid 8% (1999 Agreement, paragraph 12). Accordingly, movants have made out a prima facie case that they were entitled to be paid 8%. Fendt has relied on his own affidavit and the report in a vain attempt to contradict Movants. The affidavit is self-serving, and the report does not contradict the evidence that Urban Green was entitled to 8%. Instead the report presents an opinion that a "market rate" of 3%, is proper and if Urban Green was entitled to market rate, it took too much money. This evidence which is based on a false assumption does not rebut Movants' prima facie showing. Accordingly, the motion shall be granted, and the derivative claims against Anderson and Urban Green dismissed.
It is herby
ORDERED that the motion for contempt of intervenor WHGA Hamilton Heights Cluster Inc. ("GP-1") (motion sequence number 021) is GRANTED to the extent of holding plaintiff James Fendt and non-party Safeguard Realty Management, Inc. ("Safeguard") in civil contempt of court and is otherwise DENIED; and it is further
ORDERED that James Fendt and Safeguard shall be jointly and severally liable for the damages herein and that the subject matter of this motion sequence number 021 is hereby referred to a Special Referee to hear and recommend (1) the amount of interest at the rate of 9% that is owed to the Partnership arising from deprivation of funds Safeguard failed to turn over pursuant to the July 8, 2015 order of this court and (2) the amount of attorney fees to be reimbursed to New GP-1 and GP-1 flowing from the failure of Safeguard and Fendt to comply with the July 8, 2015 order; and it is further
ORDERED that counsel for the intervenor WHGA Hamilton Heights Cluster shall, within thirty (30) days from the date of this order, serve a copy of this order with notice of entry, together with the completed Information Sheet, upon the Special Referee Clerk in the Motion Support Office (Room 119M), who is directed to place this matter on the calendar of the Special Referee's Part for the earliest convenient date; and it is further
ORDERED that the cross-motion of Sheila Tendy, Katherine Daniels and Tendy Law Office LLC for sanctions is DENIED: and it is further
ORDERED that cross-motion of Safeguard Realty Management to quash the subpoena ad testificandum and duces tecum, dated September 26, 2016 is GRANTED; and it is further
ORDERED that the parties and Safeguard are directed to appear at a compliance conference on Tuesday, December 11, 2018 at 11:00 AM in Part 49, Courtroom 252, 60 Centre Street, New York. New York; and it is further
ORDERED that the motion of GP-1 and West Harlem Hamilton Heights Cluster, Inc. ("New GP-1") for summary judgment (motion sequence number 023) is GRANTED except the request for injunctive relief is DENIED as unnecessary; and it is further
ORDERED and ADJUDGED that the only operative governing document of Hamilton Heights Cluster Associates, LP is the Limited Partnership Agreement dated as of October 1, 1999 (a copy of which appears in the record of this case at docket no. 833) and the draft unsigned amendment (a copy of which may be found in the record at docket no. 891) is neither effective, applicable to the Partnership, nor binding upon GP-1 or New GP-1; and it is further
ORDERED that the counterclaims of A&F Hamilton Heights Cluster, Inc. ("GP-2") and A&F HHC Equities LLC ("New LP") are DISMISSED, and it is further
ORDERED that the motion of defendants Urban Green Builders, Inc. and Eric Anderson for summary judgment dismissing all remaining derivative claims is GRANTED and said defendants are directed to Settle Order as to the issues addressed in motion sequence number 024.
This constitutes the decision and order of the court.
DATED: November 2, 2018
ENTER,
/s/ _________
O. PETER SHERWOOD J.S.C.